In principle, the idea of applying for a mortgage is relatively simple. You approach a mortgage lender, go through the facts and figures, work out your maximum mortgage and take it from there.
In reality, it is a little different, and there are many factors to take into consideration before even applying for a mortgage.
We will now take a look at the various stages of a mortgage application, what you can do to improve your chances and what mortgage lenders are looking for.
Mortgage Preparation Work
When you find a property that you like, it can be tempting to rush full steam ahead to the nearest mortgage lender. While for many, this is a natural urge, you need to look at your situation beforehand and see what you can do to improve your chances of securing mortgage funding.
As you would expect, when applying for a mortgage, one of the first things a lender will do is look at your credit report. This will show your history, any outstanding issues and any potential problems that lenders should be aware of. In reality, a bad credit report could stop your mortgage application in its tracks!
Therefore, it is sensible to request a copy of your credit rating/report as soon as you decide you are going for a property. This will show your current rating and give an indication of the recent trend and any issues you need to address.
There are various ways which you can improve your credit rating such as, bizarrely, applying for additional credit but not necessarily using it. Many also believe that opening, for example, an additional savings account will help prove your creditworthiness.
In reality, it is good old-fashioned common sense, if you are having financial problems then address them sooner rather than later.
Some people will notice discrepancies on their credit report when they request a copy. If there are problems and some of the information is simply incorrect, then this needs to be addressed as soon as possible.
Unfortunately, these discrepancies do occur from time to time, and unless you regularly check your credit report, you may not be aware of them.
However, when your potential mortgage lender applies for a copy of your report, they will go through it with a fine-tooth comb. They will miss nothing!
Work on Your Budget
Whether you are single, married, divorced or living with your partner, you should review your monthly living budget as soon as you decide the time is right to buy a property.
There are numerous ways in which you can save a few pounds a month, combining insurance cover, looking for better mobile phone offers and even reducing your food expenditure.
Then we have the potential to downgrade to a cheaper rental property in the short-term, allowing you to save for a deposit, or moving in with friends and family.
Once you begin to go through your budget/expenses, you will no doubt spot a number of areas in which you can save money, which you can put aside for a deposit. Again, as with many elements of a mortgage application, there is a temptation to look at the figures through rose-tinted glasses.
Where there is expenditure no longer required, cut it out. When you can potentially organise a better deal, don’t sit on it, do it today. However be realistic, don’t slash your social budget if you are a very sociable person and this is a big part of your life.
If you go to a mortgage lender with a copy of your old budget and your new budget, it will need to be realistic. Put yourself in the shoes of a lender, if someone was to approach you with a budget which was quite frankly impossible to abide by then this is not a good start.
Be honest, be frank and above all be sensible, mortgage lenders don’t expect you to cut your expenditure to the bone, but they might expect you to be a little more cost-conscious.
Are You Ready for a Mortgage?
While this may be a strange question to some people, you do need to ask yourself after looking at credit ratings, budgets and hopes for the future, are you actually ready for a mortgage? It may be that you have expenses coming up in the short to medium-term, perhaps you are due additional funds in the medium to longer-term, or you may be approaching an upheaval in your career.
Can you imagine the huge pressure of changing careers, moving house and covering mortgage payments all at the same time? That would be madness.
It is obvious, for the vast majority of people in the UK, an investment in their home will be the largest investment of their life. So, you need to be ready from a financial point of view, you need to be ready from a personal point of view, and more importantly, you need to be ready from a mental point of view.
If you can honestly say that you have considered all of the above comments and you are still “ready” then now is the time to begin the application process.
We are not suggesting putting walls in front of your ambition, more being sensible and sometimes taking off those rose-tinted glasses and looking at the figures in the cold light of day – with no emotion. Not easy granted but very important!
Mortgage Application Process
The mortgage application process is fairly well-defined and very basic. Find a mortgage broker/lender, negotiate the best deal, receive the funds, buy your dream home and start your new life.
In reality, it is a little different, and the mortgage application process can be challenging in some cases. We will now take a look at the various aspects to take into consideration and how to ensure you have secured the best terms for your situation.
Even though the Internet has brought the mortgage market into homes and offices across the UK, it is still a fairly complex sector. Remember, with the average home in the UK valued at in excess of £200,000, the majority of homeowners will be signing up to their largest lifetime investment.
This is why mortgage advice is still strongly recommended, to ensure any deal is shaped around your particular situation.
When looking at mortgage advice, the following factors will come into play:-
- Credit rating
- Living expenses
It is not just a case of finding a mortgage deal that fits at the moment; it is a case of finding one which fits now and is flexible enough to accommodate any changes in the future.
These changes could include a change in career, an increase in income or a family, as just a few examples. This is one of the main reasons why flexible mortgages are more popular and more available today than they ever have been.
Online Then Face to Face
There is an array of online mortgage calculators available today which will give you an idea of your maximum lending, deposit requirements, traditional LTV and the best deals on the market. It is also possible to mix and match deals with additional collateral, guarantors or other factors which can make a huge difference to a mortgage decision or indeed refine/reduce the long term cost.
As a consequence, there is every chance that you can apply for a mortgage in principle online and then approach the lender directly to confirm the funding offer. While the chances are that a mortgage agreement in principle will be upheld in practice, this will depend upon all factors being revealed during the online application process.
You will often find that those looking to acquire property at auction will regularly use online services to gauge the level of borrowings they can access prior to bidding on properties.
Again, there is a degree of risk in using mortgages in principle, but as long as everything is revealed and no important financial statistics are held back, there is no reason why the original decision would not be upheld.
Mortgage Affordability Check
The regulations for mortgage affordability in the UK are directly related to traditional banks with private banks, niche lenders and crowdfunding operations both funded differently and allowed more flexibility regarding income/debt ratios.
Traditional Mortgage Lenders
For many years the so-called high street banks of the UK dominated the UK mortgage market which was in the early days less complicated and more of a “vanilla” type. In the aftermath of the 2008/9 US mortgage crisis, we saw a significant tightening of regulations surrounding the mortgage affordability checks carried out by traditional mortgage lenders.
As a consequence of the downturn, many banks also saw a weakening of their balance sheets and withdrew from high LTV ratio mortgages that required relatively small deposits.
At this moment in time, the affordability test carried out by traditional mortgage lenders will limit a mortgage to 4.5 times an individual’s annual income or 4.5 times the combined annual income for a joint mortgage. If you consider the average UK income to be around £25,000, this equates to a maximum £225,000 joint mortgage so long as the relevant deposit can be raised.
It is unlikely that the majority of mortgage applicants will be eligible for the maximum 4.5 times income ratio. However, if a relatively high deposit was available, then this would effectively increase the buffer between mortgage debt and the value of the property. The basic risk/reward ratio would be reduced.
As many of the U.K.’s more traditional mortgage lenders took a step back in light of the 2008/9 downturn, many private banks stepped forwards, out of the shadows. This has seen a significant portion of tradition U.K. mortgage business now being directed towards private banks which are more flexible when it comes to basic affordability calculations.
While normally private banks tend to deal with high net worth individuals, this is not always the case. However, what you tend to find is that mortgage divisions are often used as a means of attracting new customers to the group’s wider “wealth management” operations.
While private banks will still negotiate competitive “vanilla” mortgage funding, they tend to offer specialist advice for non-traditional financial scenarios.
For example, many clients may be asset rich but cash poor, maybe foreign nationals are looking to acquire property in the U.K. with no footprint or those with the various worldwide income streams which are not always appreciated by traditional lenders.
There is no one size fits all when it comes to private bank mortgages and as consequence interest rates will reflect a client’s individual scenario.
While traditional banks have seen their share of the overall mortgage market reduced, they are still very popular when it comes to more straightforward applications. We then have the private banking sector, which is more flexible and more able to shape an agreement around a client’s specific scenario.
Niche lenders take a different view of the market; they may look at specific areas such as the buy to let sector and offer specialist advice and specialist finance. Due to the sheer volume of business created by leading niche lenders, they can be extremely competitive and often undercut traditional and private banks.
As the term suggests, it is unlikely that a niche lender would look at more than one element of the market, instead choosing to focus their resources on creating a high-value focused mortgage offering.
Many niche lenders will also have strong relations with mortgage brokers which again strengthens the argument for using mortgage brokers as opposed to self-research.
Crowdfunding platforms have taken the market by storm over the last decade with many focusing on property markets and the likes of development funding, bridging loans, etc.
They tend to be highly competitive in the rates they offer due simply to the fact they connect those offering finance with those seeking finance. Initially, the sector seemed to fall between two stools with regards to regulation within the European Union/U.K., but these have been tightened of late.
This has enhanced confidence in the sector, and many experts believe there will be a further significant growth area in the short, medium and longer-term.
Mortgage LTV Ratios
There are many factors which will affect individual mortgage LTV ratios not to mention the outlook for the wider economy and mortgage sector. While traditional mortgages are limited to 4.5 times income, there were no such strict limitations with regards to private banks, niche lenders and crowdfunding platforms.
They will all operate within sensible risk/reward ratios, but they can vary their LTV ratio to reflect an underlying client’s scenario.
At this moment in time, a traditional mortgage would apply an LTV ratio of no more than 80%, therefore, requiring a minimum 20% deposit. If you look back to the heydays of the UK property market, many mortgage lenders such as Northern Rock were offering 100% mortgages (and indeed 110% mortgages in some cases!) but those days have long gone.
Banks are now more risk-averse, regulations are much tougher, and indeed the general public certainly has a reduced appetite for 100% mortgages.
That said, as markets recover some mortgage lenders will extend the LTV ratio, in certain circumstances, to above 80%. The situation can vary significantly with private banks, niche lenders and crowdfunding operations but any funding deals offering an LTV of above 80% would likely involve significant income, collateral or a guarantor.
Basically, this reduces the risk to the lender with additional collateral, increasing the buffer zone between debt and property/collateral value. Where there is a guarantor (they would also be expected to provide collateral) the lender would simply revert to the guarantor if the underlying client defaulted on mortgage repayments.
While the traditional income to debt ratio is a maximum of 4.5 times annual income, as we mentioned above, private banks, niche lenders and crowdfunding platforms operate under different conditions. For example, a traditional bank may ignore (or at the best discount) foreign income streams when calculating mortgage affordability while other lenders may take this into account.
In many ways, this perfectly reflects the growing trend for diversification which has seen many real estate investors acquiring assets in different countries. It is unlikely that a traditional bank would be competitive in this area; therefore, other lenders have stepped in to fill what had become a growing void.
There is a general misconception that private banks, niche lenders and crowdfunding platforms are willing to take on a high degree of “risk”. In reality, they will still do their own review of a client’s income, assets, collateral and ability to pay.
The fact that they may appreciate different income streams, different assets and potential employment changes going forward (higher career earnings) is often overlooked.
With the maximum LTV ratio currently standing at around 80%, this means that the minimum deposit required is around 20%. When you consider the average property in the UK is valued at circa £250,000, this equates to a £50,000 deposit.
As you can imagine, with first-time buyers, the lifeblood of the property market, few first-time buyers would be in a position to raise this level of deposit.
You will not be surprised to learn there are specialist mortgages available for first-time buyers with reduced deposit requirements as low as 5%. Government funding is currently available to assist first-time buyers in topping up their deposit to a more acceptable level.
In effect, governments are investing in first-time buyer properties and will retain a stake until the property is sold or the stake is bought out, at market value, by the property owner.
One of the main problems for the mortgage market is the long-term differential between salary inflation and property price inflation.
Historically property prices have increased at a far greater rate than salaries which has therefore limited the availability of traditional mortgage funding. The government and housebuilders have committed to building more first-time buyer-focused homes, available at significantly less than the average property price.
This will allow many first-time buyers to climb onto the property ladder, but there are still long-term challenges with regards to income/mortgage multiples and deposit requirements.
In recent times, with UK base rates near historical lows, there has been growing interest in remortgaging. This has seen many property owners significantly reducing their mortgage interest rate, therefore, improving their short-term cash flow.
Indeed, remortgaging can often allow homeowners to withdraw equity from their property which could be used to pay off high-interest debt. This is a very specialist area of the market and perhaps not as straightforward as many people might assume.
For example, even though you are able to afford your mortgage today, on historical rates, if you apply for a remortgage, you would have to undergo an affordability test. Under the new regime, there is no guarantee that every homeowner would pass the test with many seeing their remortgage applications rejected.
This then leads on to equity release schemes which account for a growing share of the UK mortgage market. The option for more mature homeowners to release capital with lifetime mortgages, where interest is rolled up and paid off on death, or home reversion plans, where they sell a percentage of their property, continues to see the ever-increasing interest.
This is an often complex area of the mortgage market where specialist advice is required.
In theory, the mortgage application process is relatively straightforward, work out your budget, find a mortgage, find a property and buy that dream home. In reality, it is very different and will take in a whole host of different factors.
While the Internet has opened up the possibility of direct mortgage applications, it is worth noting the depth of information required. The process itself can be long-winded, taking weeks on average, and this can be extended if incorrect paperwork is supplied or it may be out of date.
This further strengthens the position of mortgage brokers who will not only use their mortgage contacts to get the best deal for their customers but also advise, in minute detail, on the information and paperwork required.
Knowing who to approach, how to approach them, the type of information required, and the potential level of funding is especially useful for time-critical mortgage applications.
There’s also the fact that many private banks and niche lending companies prefer to communicate through mortgage brokers, who also have an in-depth knowledge of the market, rather than directly with clients.
So, before you even think of a mortgage or approaching a mortgage broker, there is significant prep work to carry out.
How Can The Mortgage Bank Help?
Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.
They have already helped thousands of people get the best remortgage deal even people that have been refused before, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.